Borrowers brace for rate rise

The head of Australia's biggest lender has hinted that steep bank funding costs
could lead to sharper rate rises as the prospect looms of another adjustment by the
Reserve Bank.
Key inflation data, due out on Wednesday, is expected to be on the high side of the
central bank's two to three per cent inflation target.
Economists say this could trigger another rate rise on November 2 when the bank's
board meets again.
"We maintain our view that the Reserve Bank will hike its cash rate by 25 basis
points to 4.75 per cent at the November meeting," Nomura Australia economist Stephen
Roberts said on Tuesday.
Under this Melbourne Cup Day scenario, monthly mortgage repayments on a $500,000
loan would rise by $85.
The cash rate has been frozen at 4.5 per cent since May but Christmas is expected to
be less rosy for those paying off a mortgage.
The spectre of higher inflation in 2011 would spur the Reserve Bank to raise rates
again in December and February, Mr Roberts said.
This would take interest rates to 5.25 per cent and add $260 a month to many capital
city mortgages.
Borrowers would pay even more if banks raised their lending rates beyond a move by
the Reserve Bank.
The boss of Australia's biggest lender hinted this could happen again, saying banks'
funding costs were now higher than before the global financial crisis.
"Funding costs are now significantly higher for all Australian banks than they were
prior to the GFC, and this is likely to remain an issue for all banks in the short
to medium term," Commonwealth Bank chief executive Ralph Norris told shareholders at
the bank's annual general meeting in Sydney.
Official inflation data for the September quarter could stir more mortgage worries.
Economists surveyed by AAP expect the consumer price index (CPI) to show inflation
growing at an annual growth pace of 2.9 per cent, putting price pressures on the
high side of the central bank's long-standing two to three per cent target.
The prospect of more rate rises in 2011 is likely to keep the Australian dollar well
supported.
An Access Economics business outlook report, released on Tuesday, predicted the
currency staying above 90 US cents in 2011.
The Australian dollar climbed closer to parity during offshore trading on Monday
night, reaching 99.7 US cents.
"We face roughly a year with the dollar being strong," the forecaster's director
Chris Richardson said.
Wage costs, too, would add to inflationary pressures as unemployment fell below five
per cent, he said.
The government is also bracing for a lower jobless rate, with Treasurer Wayne Swan
telling the Labor caucus on Tuesday that better-than-expected employment forecasts
were likely when his department's mid-year economic and fiscal outlook (MYEFO) was
released by December.
The business sector appears less deterred by the prospect of higher rates.
Access predicted business investment would replace stimulus spending in 2011 as a
key driver of growth, with engineering projects in the resources sector tipped to
lead the charge.
The National Australia Bank's business survey for the September quarter showed
confidence at its highest levels since late 2007, before the global financial crisis
hit.



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